informed that the NBU Board has decided to maintain its key policy rate at
18% per annum.
We believe that
the current and forecast monetary conditions are sufficiently tight to bring inflation
to its medium-term target of 5% in 2020.
developments followed the last key policy rate decision?
In September 2018, consumer price inflation reached
8.9% yoy, having exceeded both the upper limit
of the target range (6.5% ± 2 pp set for the end of Q3 2018) and the
July projections of the NBU (8.3%).
The moderate drop in inflation compared with previous months was due to
slower growth in food prices, driven by an increase in domestic and imported
supply of food products, as well as lower global food prices.
At the same time, the underlying inflationary pressure remains strong. This
is reflected in the sustained high reading of core inflation (8.7% yoy in September), which is above the NBU’s July
First, domestic demand remaining high and further growth in production
costs, including labor costs, put an upward pressure on prices.
In Q2, the growth in the final consumption expenditure accelerated to 5.6% yoy. In particular, there was a sizeable increase in
household spending on clothing and footwear, home goods, and transportation.
In addition, investment demand has been growing rapidly for the third
consecutive year. The gross fixed capital formation rose by 14.2% yoy in Q2, supported by high business expectations.
The sustained strong demand is also reflected in
the relatively high growth in retail trade and transportation, which has added
5.5% and 4.8% yoy respectively over
January–September. Growth in imports of consumer goods also accelerated
Rapid wage growth and social payments – particularly, pensions – supported
growth in demand. In August, the average nominal wage in Ukraine was 26% above
the previous year’s level. Along with that, as seen in the quarterly business
outlook surveys conducted by the NBU, more than half of companies continue to
state that labor costs have a significant influence on producer prices.
Second, the hryvnia weakening against the US dollar in July–August
influenced prices of some goods, especially imported ones.
Third, the rapid growth in global crude oil prices seen in the past months
passed through to fuel prices and contributed to higher cost of other goods and
In September alone, prices for Brent oil rose by 8%. Today they are 43%
higher than a year ago. Amid the hryvnia
depreciation in the past few months, this made domestic fuel prices increase
further to 23% in September.
This boosted growth in prices for those goods and services cost of which
strongly depends on fuel prices. For example, prices for road transportation
services rose by one quarter in September.
The above factors and the approaching presidential and parliamentary
elections to take place next year affected the inflation expectations. In
particular, household expectations deteriorated. Businesses, banks, and
financial analysts maintain high inflation expectations, at levels much above
the NBU’s inflation targets.
What are the
future inflation developments?
inflation will decline, although it will take longer than expected to meet the target.
the above factors and the anticipated rise in administered prices, the NBU has
revised its 2018 inflation forecast upwards, from 8.9% to 10.1%.
The increase in
consumer demand, rapid wage growth, and the recent jump of crude oil prices
will continue to impact consumer price inflation next
year. This will keep inflation above the target range for longer than expected.
Inflation is projected to decline to 6.3% as of the end of 2019. It
will enter the target range in Q1 2020 and reach the medium-term target
of 5.0% at the end of 2020.
The slowdown in
inflation will be mostly driven by the tight monetary conditions, which the NBU
Board believes have formed as a result of the previous
key policy rate hikes. Such conditions will ensure the balance between the need
to reduce inflation and bring it to the target and the need to maintain the
At the same time,
other factors will enhance the tight monetary policy stance. Banks are expected to continue raising interest rates on hryvnia
household deposits due to shrinking bank liquidity surplus and in response to
the previous key policy rate hikes. This will incentivize Ukrainians to shift
from spending towards more saving.
year, labor migration from Ukraine will not put such a significant upward
pressure on wages as in the previous two years.
Inflation will also be reined in by prudent fiscal policy and the moderate
pace of imported inflation on the back of reasonably low exchange rate
things, exchange rate and inflation expectations are expected to benefit from
positive signs that some progress has been achieved in ensuring cooperation
with official lenders, in particular entering into a new arrangement with the
IMF that will carry over for the next year.
The NBU has also
scheduled revisions of other macroeconomic forecasts
It has made no
change to its economic growth projections for 2018–2020. As before, the
central bank expects that economic growth will accelerate to 3.4% in the
current year. The growth will be mainly propped up by
private consumption, as household income increases further. The investment
activity of companies will also remain rather buoyant.
In 2019, real GDP
growth will decelerate to 2.5%, due to a slowdown in the global economy, a fall
in global commodity prices, tight fiscal policy resulting from the need to
repay large volumes of public debt, as well as tight monetary conditions
required to bring inflation back to its target.
In 2020, economic
growth will speed up to 2.9%. The growth will be fueled
by a mostly gradual easing in monetary policy, which will become possible after
inflation stabilizes at a level close to the target, as well as by the
economy’s greater investment attractiveness.
will be in equilibrium in 2019 – 2020. The current account deficit will
continue to hover between 2.5% and 3% of GDP, and will be
offset by official financing and private capital inflows.
macroeconomic forecast is based on the assumption that
Ukraine will continue to cooperate with the International Monetary Fund under a
new Stand-By Arrangement.
The new Stand-By
Arrangement can definitely be regarded as a positive
development for Ukraine.
First, new loans
from the IMF, and related financing from other Ukrainian partners, will boost
the country’s macrofinancial stability.
Second, the new arrangement is an anchor for state policy, and will
therefore lay the foundation for an improvement in expectations and Ukraine’s
access to the global capital markets.
The NBU sees a
further rise in consumer demand and a deterioration in inflation expectations
as the main risks that the said macroeconomic forecast may not materialize,
including that inflation may not meet its 2020 target.
expectations could continue to rise, driven by a new political cycle.
conditions could deteriorate.
● A more rapid
slowdown in the global economy, including in the economies of Ukraine’s main
trading partners, is one of the main external risks.
The IMF has
recently revised downward its global economic growth projections for the coming
years. Its potential for growth is hampered by the low
capital investment and depressed productivity growth that persisted for a long
time after the global financial crisis. In addition, the disparity between the
rates of economic growth in developed and developing economies is rising.
The IMF sees an
escalation of trade wars, geopolitical tensions in the Middle East, a
deterioration in financial conditions, and higher energy prices as threats to
the global economy.
● A decline in
global commodity prices is another important external risk for Ukraine.
wars are increasing trade regionalization and putting downward pressure on
commodity prices. In particular, one should follow developments on the steel
market. In spite of there being a global surfeit of steel, the supply of steel is expected to grow further. In 2019 – 2020, new foundries are scheduled to be commissioned in Middle Eastern, African,
and Southern and Central American countries. This could push down steel prices
more than is envisaged in the NBU’s current forecast.
● A further rise in
global energy prices is yet another risk for Ukraine.
The global oil
market is expected to face oil shortages at the end of
the current year, resulting from the second round of sanctions imposed on Iran,
and a seasonal increase in oil consumption.
● One should also
bear in mind potential capital outflow from developing economies, including
Ukraine, due to the central banks of leading countries tightening their
monetary policies at a fast clip.
the NBU will keep an eye on inflationary pressures in the United States. If
inflationary pressures rise, the Fed could raise its interest rate more
rapidly. Resulting increases in the yields of U.S. long-term government
securities will make risky financial assets, including the debt instruments
issued by developing economies, less attractive to investors.
Why did the Board
decide not to change the key policy rate?
account an updated macroeconomic forecast and the assessments of the above
risks, the NBU Board believes that existing monetary conditions are tight
enough to reduce inflation in the mid-term.
However, the NBU
will continue to keep a close watch on factors of underlying inflationary
pressures, in particular on consumer demand, inflation expectations and any
progress achieved in ensuring cooperation with international official lenders.
What will the NBU’s monetary policy stance be
pressures do not ease or even build up, the central bank could raise the key
policy rate again.
To learn more about a new macroeconomic forecast, please
see the Inflation Report that will be published on 1
A summary of the discussion by Monetary Policy Committee
members that preceded this decision will be published
on 5 November.
The next meeting of the NBU Board on monetary policy
issues will be held on 13 December 2018.
Thank you for your attention!